Competitiveness of the enterprise

In my previous column, I looked at competitiveness at the European or national level; in this column I’d like to take the discussion from a macro to micro level, and deal with competitiveness at the enterprise level.

What are the symptoms of a competitive enterprise? An enterprise is definitely in the top tier in terms of competitiveness if it exports products or services all over the world, with higher client satisfaction and profitability than its competitors.

While competitiveness often means that a company has a price advantage, there are also other items on which a company may compete, such as innovation or quality. Virtually always, a company that is competitive has a unique selling proposition that is truly unique, either in price, quality or innovation, in a way that really matters to its customers.

If customer tastes change or evolve, competitive advantage may be eroded. Or if competitors match the unique selling proposition, the proposition is no longer unique. Competitiveness is never static; as the market evolves, the bar is always being raised.

A book that is widely recognised as the seminal work on competitiveness, The Competitiveness of Nations, was written by Michael E. Porter, a Harvard professor, in 1990. His basic paradigm is explained by the chart above.

Allow me to illustrate each of the five competitive forces at the enterprise level.

Threat of new entrantsIt is difficult for a company to be competitive when there are low barriers to entry. Such industries become dog-eat-dog industries. Sometimes new entrants, especially if they bring technological innovation, can be highly disruptive – for example when Skype and Vonage entered the telecom industry.

Bargaining power of buyersIf you are a small processor of foodstuffs, unless you have a world-beating product, or a very strong brand, chances are that you’ll have a hard time selling to hypermarkets. They can play you off against the competition, and increasingly, even sell their own "no name" products.

Bargaining power of suppliersSometimes a supplier can be so dominant, that their clients have little negotiating power. For example, if you are an airline that wants to purchase wide-bodied aircraft, there are only two suppliers in the world, Boeing and Airbus. You do not have many options if the aircraft producers wish to raise price or experience production delays.

Threat of substitute products or servicesSometimes competition comes from completely unexpected sources. I, for example, have not used a watch in more than 15 years – my mobile phone serves as my timepiece. Another example: Google thought it had the internet by the tail – until Facebook emerged. Social networking trumped accessing of information.

Rivalry among existing competitorsWhat are the dynamics of the industry? Are the participants sleepy oligopolists or is there dog-eat-dog competition? Even the Airbus-Boeing duopoly shows signs of being very competitive at times.

As mentioned, competitiveness is not static, it is dynamic. A company that is competitive cannot rest on it laurels; it must constantly innovate and invest to maintain its competitiveness, or even grow it. For example, the German auto industry seems to have widened its lead over other European competitors over the past five years.

So what can governments do to foster competitiveness? In many accession countries, there are countless EU grants being handed out to enterprises. I am not sure that these foster competitiveness. Some of these grants may prop up enterprises that would otherwise fail.

My fear is that these grants may also create a culture among enterprise owners and managers giving them incentives to become better at competing for handouts than competing in the marketplace. In my view, the best thing that a government can do is provide the right environment for businesses – easy administration, fair and enforceable laws and regulations that do not change too frequently, a fair tax and social security regime, etc. Government was never particularly good at "picking winners". This should be left to the market.

Competitiveness – at both the national and enterprise level – should be square in the centre of the debate on how to resolve the European crisis. If it is mostly Germany enterprises who are competitive within Europe – and few companies in the European "periphery" – there will be no sustainable solution to Europe’s current issues.

* Les Nemethy is CEO of Euro-Phoenix Financial Advisors Ltd. (www.europhoenix.com), a Central European corporate finance company focused on Mergers & Acquisitions. He is the author of Business Exit Planning, published by John Wiley & Sons, available on Amazon, and Успешно излизане от бизнеса published by Klasika I Stil Publishing House in Bulgaria.